Capital Market Discipline Research Articles

Financial market discipline on bank risk: Implications of state ownership

This study investigates the link between capital market discipline and bank-level credit risk with a special emphasis on the role of bank ownership structure. Focusing on a large emerging market, Türkiye, characterized by a prominent state bank presence, our baseline regression results indicate that banks' stock price volatility elevates in response to the increases in non-performing loan ratio for the period 2008–2021. More importantly, the extent of capital market discipline on credit risk is amplified for state-owned banks. This finding remains similar against a myriad of robustness checks. To analyze the implications on alternative financial markets, we further extract high-frequency implied volatility measures from options contracts recently traded on individual bank stocks. By utilizing the Covid-19 outbreak as an exogenous shock to local banks’ loan portfolio quality, we perform difference-in-differences estimations for the interval of October 2019–June 2020. Our findings show that the implied volatility for non-private banks increases more in the post-shock phase compared to other bank ownership types.

Role of Disciplinary Tools in Maintaining Bank Performance and Financial Stability: Evidence from Emerging Economies

The aim of this study is to examine the role of disciplinary tools, that is, capital adequacy requirement and market discipline in maintaining the banks’ performance and financial stability. The study employs a panel dataset of 600 commercial banks from BRICS economies for the period ranging from 2005 to 2020 using the panel regression. The robustness of the results is validated using the system GMM (generalized method of moments). The study reveals that, in a linear model, capital adequacy ratio has a positive influence on performance and stability, and market discipline has a negative influence on performance and stability. In a non-linear model, capital adequacy ratio has a concave relationship. Further, the study discusses the critical determinants of profitability and stability. JEL Classification: G21, G28, G32

Organizational Mergers and Sustainable Competitive Advantage of Almasi Beverages Limited, Kenya

In recent times, sustainable competitive advantage has become a common phenomenon worldwide. Organizations have been forced to adopt sustainable competitive advantage as a crucial strategic tool to deal with the ever-increasing global market competition. In many companies, mergers are strategic growth plans which not only helps them stay in competition but also extends their dominance, market share and margins in the global setting. Mergers facilitate firms’ fast growth and a capital market discipline mechanism improving efficient management and profit maximization. The goal of the study was to evaluate how the Kenyan beverage industry sustainable competitive advantage was affected by mergers. Specifically, the study sought to investigate the effect of economies of scale, diversification and also synergy on sustainable competitive advantage of Almasi Beverages Limited in Kenya. The study was underpinned on the following theories; the theory of efficiency, the resource-based view theory, and the hubris theory. The research utilized the descriptive research design. Secondary and primary data was utilized. Primary data was collected using a questionnaire. Blank responses were not included when analyzing the data. Descriptive statistical methods such as mean, frequency, percentages were used for analysis. Research findings were presented through graphs charts and tables. Findings revealed that revealed that Almasi Beverages sustainable competitive advantage was positively and significantly influenced by economies of scale, by diversification, and by synergy. The study concluded that economies of scale led to the firm enjoying large discounts and cheaper more affordable prices, improved capital equipment and production processes, and having quality managers working in various departments. Diversification led the firm to have a wide range of products on their product line, new designs within the organization that were aesthetically designed and were more superior in branding, and new products offerings in the organization contributed to sustainable competitive advantage. Synergy led the firm to have a stronger bargaining power for inputs, stronger bargaining position for cost of capital, and ensuring that the organization was running efficiently and in an effective manner, expediency of the logistics team in terms of their speed and responsiveness, and financial independence would all enhance the organizations sustainable competitive advantage. The study recommends that the organization should adopt a culture of continuous improvement around product improvement through innovation to ensure that it gives the firm sustained competitive advantage in the long run. In order to remain different from competitors, Almasi Beverages should focus on high product quality, fast delivery, design and new products, and unique product features. To achieve this, the study recommends that the firm should embrace differentiation as the key competitive strategy and set sufficient resources. Further, positive competitive advantage should be attained by more beverage firms in Kenya through their firm consolidation via the merger strategy.

Capital Market Discipline and Bank Credit Risk: The Role of Bank Ownership Structure

Capital Market Discipline and Bank Credit Risk: The Role of Bank Ownership Structure

Global Capital Cycles and Market Discipline: Perceptions of Developing-Country Borrowers

AbstractDeveloping countries are often thought to be particularly exposed to the constraints of global markets. Facing scrutiny from foreign investors, why do developing-country governments enter international bond markets, especially when they can access cheaper finance from international financial institutions? I argue that borrowing governments' perception of market constraints depends on global liquidity. When bond markets are highly liquid, investors become more risk acceptant and governments perceive the political costs of borrowing to be lower, especially compared to the conditionality of concessional loans. I use data on the timing of bond issues and three case studies—Ethiopia, Ghana, and Kenya—to demonstrate that choices to issue debt were shaped by global liquidity. These findings nuance debates about how markets constrain governments, emphasizing that market constraints are conditional on systemic factors, including, global liquidity.

Relationship between market discipline and capital buffers in Brazilian banks,

ABSTRACT The aim of this study was to investigate the relationship between the market discipline and the capital buffers of Brazilian banks, identifying the channels through which this phenomenon materializes. The literature on market discipline and capital buffers has focused on developed countries. In Brazil, the topic is in its infancy, despite the characteristics of the market representing a relevant opportunity for broadening the related studies. Even with the specificities of an emerging market, the Brazilian banking industry provides a vast field for studying market discipline and capital buffers, given that the banks have leverage with investors, who are sensitive agents to alterations in the risk appetite of those entities. This study contributes to understanding the dynamics of the market discipline in the banking industry and to fostering discussions about the role of that private supervision in promoting the transparency and solidity of the financial system, providing support and guidelines for banking regulation. Using data from 193 Brazilian banks, from 2001 to 2017, the empirical tests included the estimation of panel data models, with the use of two-stage least squares (TSLS), following Ayuso et al. (2004), Flannery and Rangan (2004), and Nier and Baumann (2006). As the discipline exercised by the monitoring and influence of the market is not directly verifiable by external agents, six proxies were developed based on the cost of fundraising, on unsecured deposits, on subordinated debt, and on disclosure. The capital buffer was represented by the difference between the capital calculated by the institution and the minimum regulatory requirement. The results of the empirical tests revealed a positive association between the capital buffer and market discipline, providing evidence of the presence of that private supervision in the Brazilian banking industry.

Assessing Effects of Capital Adequacy Ratio Requirements on Loan Demand of Kenya Commercial Bank Eldoret Town

Security of investors' reserve remains the significant worry of bank controllers. It is in this regard the capital sufficiency becomes significant and imperative. Capital adequacy is an origination that results from reworking the banks' current capital structure to rebuild the banking industry against the widespread establishment. This research's objective was to assess the effect of capital adequacy ratio requirements on the Bank of Kenya Commercial Bank's loan demand. The study adopted the Capital Buffer Theory. The study reviewed related literature to capital adequacy ratio requirements on the efficiency in the Bank. This study adopted an exploratory research design. The sample population of interest in this study consisted of all 23-bank employees of KCB, Referral Branch. The study adopted a census survey. The following research questions guided the interview. How effective would be capital adequacy ratio requirements on loan demand of Kenya Commercial Bank? The study used interview guides in the collection of data. Qualitative analysis was used to analyze the perception data collected from the key informants. Joint subjects were determined, and qualitative data, organizing, and discussing based on the main objective were done. These were presented using grouped data collected in the form of discussion. From the interviewed respondents, it was found that there might be significant impacts of capital adequacy ratio requirements on loan demand of KCB. The elasticity of loan rate due to capital adequacy ratio requirement might affect loan demand, implying that there would be a change in loan demand for every percentage change in the loan rate. The study recommends that bank regulators be keen on the banks' capital adequacy ratio by laying down financial regulations on liquidity since financial regulation aims to enable banks to improve liquidity and solvency. Stricter regulation may be suitable for bank stability, but not for bank efficiency; restricting banks may lower bank efficiency and increase the probability of a banking crisis. There is a need for capital supplementation to keep up with Capital Adequacy Ratio (CAR) since stricter capital adequacy, robust supervision, and market discipline power promotes technical efficiency. Keywords: Loan, Demand, Ratio, Capital, Bank DOI: 10.7176/RJFA/12-6-06 Publication date: March 31 st 2021

Impact of Capital Regulation and Market Discipline on Capital Ratio Selection: A Cross Country Study

We aim to analyze the impact of capital regulation and market discipline on capital to risk-weighted assets ratio. We used the panel data of Asian developing-countries banks for the period from 2009 to 2018. We collected data from the financial statements of 73 banks of Pakistan, Jordan, Indonesia, the Philippines, Saudi Arabia, and Thailand. We used the generalized method of moment (GMM) to analyze the results. We find that capital regulation and market disciplines significantly influence the capital ratio in Asian developing countries.

Takeover Bidss Profile Under Mandatory Bid Rule: Evidence from an Emerging Market

This paper examines the main determinants of the bid premium and tender success under mandatory bid rule, viewed as a corporate governance mechanism in blockholder regimes. We explore a comprehensive dataset covering all the takeover bids organized on the Romanian market for corporate control between 1998 and 2012. The peculiar institutional framework in Romania allows to factor in the analysis novel structural elements, like privatization transactions conducted by the government outside the stock market, trading made by insiders before the bid and dilutive capital increases. After controlling for the influence of ownership and corporate governance attributes of targets, our main findings suggest that various market price components are strong predictors of both bid premiums and tender success. The tender decision depends also on the scope of expropriation perceived by minority shareholders of the target. Our study concludes that stronger capital market discipline is at least as important as the legal details of takeover regulation for insuring an effective protection of minority shareholders.

Compliance of Basel III Norms: Comparison of selected Nationalised, Private and Foreign Banks

Paper compares compliance of BASEL III norms as given by RBI by selected nationalized, private and foreign banks. There are three categories of banks in India-Public, Private and Foreign banks. Nine banks, three in each category were selected. Data related to 3 factors of Basel III norms i.e., Capital Adequacy requirements, Supervisory Review and Market Discipline for past 10 years i.e.3 years for Basel I norms, 6 years before and 3 years after the adoption of Basel III norms was collected. It was found out that significant difference was observed in case of Tier 1 capital under Basel II and Basel III norms because the capital of the banks had to be raised in order to meet the requirements of new capital adequacy norms. Significant difference was also observed in case of CRAR of the nationalised and private sector banks. Total capital adequacy ratio of the banks was mainly affected by risk weighted assets of the banks. The more the risk weighted assets of the bank the higher is the capital to risk weighted assets ratio (CRAR). The credit risk capital requirements of private sector banks, market risk capital requirements of nationalised banks and operational risk capital requirements of private sector banks witnessed significant differences under Basel II norms and Basel III norms.

Do Banks Issue Equity When They Are Poorly Capitalized?

Debt overhang and moral hazard predict that poorly capitalized banks have a lower likelihood to issue equity, while the presence of regulatory and market pressures posits an opposite theoretical prediction. By using an international sample of bank seasoned equity offerings (SEOs), we show that the likelihood of issuing SEOs is higher in poorly capitalized banks and that such banks prefer SEOs to alternative capitalization strategies. A series of tests exploring the variation of capital regulation and market discipline show that market mechanisms rather than capital regulation are the primary driver of the decision to issue by poorly capitalized banks.

Impacts of capital regulation and market discipline on capital ratio selection: evidence from China

Purpose– The purpose of this paper is to examine the impacts of capital regulation and market discipline when China imposed most of the Basel I requirements between 2004 and 2010.Design/methodology/approach– Following Barrios and Blanco (2003) and Rime (2001), the authors apply disequilibrium and simultaneous measurements to identify the financial safety net underlying capital movements as well as the changes in credit risk levels in China’s banking sector.Findings– The authors discover that capital regulation outweighs market discipline by an average probability of 0.65-0.35 in the contribution to bank capital movements when banks significantly improve their capital buffers. In addition, the banking sector lowered its risk levels in the sample period.Research limitations/implications– The findings suggest that the largest bank-based economy has consolidated its financial system for future expansion.Originality/value– China’s banking sector requires closer examination of capital and risks provided by its emerging significance in the financial world. Thus, this study contributes to current literature.

Happy hour followed by hangover: financing the UK brewery industry, 1880–1913

ABSTRACTIn the last 15 years of the nineteenth century c.300 British brewers incorporated and floated securities on the stock market. Subsequently, in the 1900s, the industry suffered a long-lived hangover. In this article, we establish the stylised facts of this transformation and estimate the gains enjoyed by brewery investors during the boom as well as the losses suffered by investors during the bust of the 1900s. However, not all brewery equity shares suffered alike. We find that post-1900 performance correlates positively with capital-market discipline and good corporate governance and negatively with family control, but does not correlate with indebtedness.

Compliance of Basel II Norms: Comparison of Selected Public, Private, and Foreign Banks

The paper compares the compliance of BASEL II norms (as given by RBI) by selected nationalized, private, and foreign banks. There are three categories of banks in India- public, private, and foreign banks. Nine banks, three in each category, were selected. Data related to three factors of Basel II norms, that is, capital adequacy requirements, supervisory review, and market discipline for the past 6 years, that is, 3 years before and 3 years after the adoption of Basel II norms were collected. It was observed that the tier 1 capital of the selected banks after adoption of Basel II norms varied from each other because the capital of the banks had to be raised in order to meet the requirements of the new capital adequacy norms. Total capital adequacy ratio of the banks was mainly affected by the risk weighted assets of the banks. The more were the risk weighted assets of the banks, the higher was the capital to risk weighted assets ratio (CRAR). It has been observed that the nationalized banks, which were not able to comply with the new capital adequacy norms, were recapitalized.

The Impact of Ownership and Regulations on Bank Risk-Taking: Evidence from the Middle East and North Africa (MENA) Region

This paper examines how bank regulations and ownership structure individually and interactively influence bank risk-taking behaviour. We use generalised method of moments (GMM) estimation technique to analyze unbalanced panel data on 153 commercial banks from 12 Middle East and North Africa (MENA) countries. Predictably, foreign ownership is found to be inversely related to portfolio risk in all specifications, while government ownership shows positive association with portfolio risk only among the non GCC (Gulf Cooperative Council) banks. We also find supervisory power having a positive effect on portfolio risk and a negative effect on credit risk, whereas activity restrictions show opposite effects on these two risk measures. In addition, these effects are reinforced for banks with higher ownership concentration and/or higher government ownership. The GCC banks show better results in relation to negative effects of capital regulations and market discipline on portfolio risk, although these effects are inconclusive in other specifications. Overall, our study results call for an increased activism of the policymakers and regulators in enforcing regulatory reform initiatives relating to ownership and other bank regulations.

A Study of Compliance with Basel Norms by Banks in Canada

The framework is based on a three-pillar approach: minimum capital requirements, supervisory review and market discipline. Basic implementation of the framework is proposed to be effective as of year end 2006, however, advanced approaches are expected to require more impact studies with implementation as of year end 2007. The paper provides a Study of the compliance to these norms in Canada.

Micro-prudentiality and financial stability

Given the high degree of importance of issues related to financial instability in modern economies, (financial, economic and social aspects), it is necessary the analysis of the microeconomic components that determine macroeconomic fluctuations, resulting in the visible financial instability. Thus, this paper aims to analyze the following aspects: financial fragility, as a measure of financial instability at the microeconomic level; micro-prudential regulation; microeconomic reform measures, which addresses problems related to capital, liquidity, risk management and supervision and market discipline. All these are integrated into the international Basel III framework of the Bank of International Settlements Regulations. In addition, the manner and the time of Basel III implementation of the capital and liquidity-related measures is very important. In addition, the paper aims to analyze the inter-connections and the compromises between capital and liquidity, trying to understand how the two are connected.

A Primer on Market Discipline and Governance of Financial Institutions for Those in a State of Shocked Disbelief

Self regulation encouraged by market discipline constitutes a key component of Basel II’s third pillar. But high-risk investment strategies may maximize the expected value of some banks. In these cases, does market discipline encourage risk-taking that undermines bank stability in economic downturns? This paper reviews the literature on corporate control in banking. It reviews the techniques for assessing bank performance, interaction between regulation and the federal safety net with market discipline on risk-taking incentives and stability, and sources of market discipline, including ownership structure, capital market discipline, product market competition, labor market competition, boards of directors, and compensation.

Family ownership and risk-taking: Exploring nonlinear effects in financial industry

This study examined the relevance of the family ownership on risk-taking. Using a sample selected from publicly listed companies among the financial institutions in Taiwan during 1996 to 2007, this study found that the family ownership had a significant negative effect on risk-taking in the financial industry. Moreover, these influences were non-linear by the range of family ownership. In contrast, when securities and the insurance industry were the major family-controlled shareholders, the increase of its shareholding percentage was unexpected to positively affect risk-taking. These results were consistent with the “convergence-of-interest hypothesis” and were robust for several proxies of risk-taking in Taiwan’s financial industry, providing insights as to the effectiveness of regulatory discipline and capital market discipline of family businesses, and facilitating better legislative monitoring of financial activities in risk-taking. Key words: Family ownership, financial industry, risk-taking, family-controlled.

Option grant backdating investigations and capital market discipline

Using a large sample of option granting firms, some of which were investigated for option grant backdating, we develop a predictive model for such investigations and examine how the capital market responded as the backdating scandal unfolded. Firms that were investigated experienced significant stock price declines from the beginning of the Wall Street Journal's Perfect Payday series through the end of 2006. Firms predicted to have backdating problems, but not the subject of publicly revealed investigations, experienced stock price performance during the same period that was remarkably similar to that of firms with publicly revealed investigations. In contrast, firms not predicted to have backdating problems experienced normal stock price performance. Our results suggest that capital markets disciplined companies with suspicious option grant histories, often prior to, and irrespective of, any public revelation of an investigation into the matter.